Benign fission

Benign fission

It is unfortunate that corporate fusion usually attracts far more public attention than corporate fission does. Mergers and acquisitions are lavished with fawning hype, while demergers and spin-offs leave people stone cold, even in a country such as India where true-blue mergers are pretty rare.

Yet, there continues to be a lot of fissile energy being released from within Indian companies. Take a few recent examples. State Bank of India Ltd (SBI) said on Monday that the valuation of its life insurance subsidiary has quadrupled in the past six months —from $1.2 billion to $4.5 billion. According to current regulations, SBI will have to eventually list this subsidiary as an independent company in the stock market.

Last week, ICICI Bank Ltd got the government’s nod to sell a stake in its holding company, which has been valued at around $10 billion. And Pantaloon Retail Ltd announced plans on Monday to list Future Capital Holdings, a subsidiary that the main company has used to invest in new businesses such as retail finance to private equity.

Moves such as these are being used to generate cash for the parent. Pantaloon Retail, for instance, is up against cash-rich business groups such as Reliance and Bharti that have entered the business of organized retail. India’s two largest banks, too, will need to rustle up more capital to support their rapidly growing balance sheets. Many other large Indian companies have invested and backed new businesses, and later spun them off into separate listed companies to unlock value. For example, Mahindra & Mahindra did this a few years ago with software subsidiary Tech Mahindra. Various telecom companies have announced intentions to sell part of their tower business. Going by the recent record, such spin-offs usually create shareholder value.

Why are these episodes of corporate fission happening? Over the past few years, Indian corporate groups have clearly turned their back on the earlier management obsession with focus and gone back to their earlier zest to build conglomerates. Many of India’s best companies, today, have a range of unlisted subsidiaries. Banks have insurance subsidiaries. Auto companies have investments in component manufacturing. Telecom companies have various types of infrastructure. Some real estate and infrastructure companies have invested in special purpose vehicles for road projects.

Profitable companies have nurtured many new businesses such as insurance, which have long payback periods. These subsidiaries need a lot of capital upfront to get off the ground and they usually lose money by the buckets in their initial years. That is the time that the public markets are not keen on them. But then there comes a point—as with the SBI insurance subsidiary —when these new babies become profitable. It is natural that the parent would want to list subsidiaries to raise cash and reward investors.

We expect this strategy could become important in the months ahead, based on two assumptions. First, slower profit growth and huge capex requirements will eat into cash flows, thus making it difficult for companies to fund expansions from internal resources. Two, there could be problems in raising debt if the credit crunch in the global markets gets worse. Releasing some of the value frozen in subsidiaries is a smart strategy in these circumstances.

It is worth keeping an eye on what companies do to unlock the value of their subsidiaries: Will they sell small stakes to financial investors, go in for an initial public offer, bring in strategic investors who buy significant stakes, or will they exit completely? There are no easy answers, and a lot will depend on the strategy of the individual companies as well as theregulatory requirements in specific industries.

Is there really value in Indian corporate subsidiaries? Write to us at